Reference no: EM133480679

QUESTION 1

Good Tiding Limited is a company with corporate registrations in both Canada and US. The President of the company is based in Canada and from time to time, travels to the US to oversee the office there and order for the purchase of some of the articles for sale. To ensure steady supply of the products, some of the products are also ordered from China. The purchases from US and China are charged to the Canada entity in USD.

In September 2020 the President embarked on a trip to France for two weeks where he spent part of his annual holiday. During this period, he hosted a couple of friends with the costs that were paid for by the company as the costs were above his approved annual holiday expenses. He subsequently traveled to US and was quarantined for two weeks due to COVID-19 before moving to the usual business lodge that he uses. Despite using that period to oversee the US company, all the costs incurred were borne by the Canadian company.

The products bought in US and sent to Canada were charged at cost plus 25%, while the Canadian company was responsible for insurance and freight. The goods purchased from China were forwarded to Canada at cost of landing in Canada plus 30%. The China-made products are less expensive and therefore give better profits despite the cost of the long-distance freight.

Money was transferred to the President's personal account for the company's purchases in US, the purchases made in China and the President's personal expenses. An agent in China bought the goods which were paid for by the President.

The US company staff handled the documentation of all the transactions of the President while there and transferred them to Canada subject to the approval of the President.

Separate records were not maintained for the President's expenses in the US. However, his comparison of the results of the two units showed that for the immediate past financial year, the Canadian company had performed sub-optimally and way below the targeted profit in relation to the US company. The President is very unhappy about this as he expects that his personal visit to US would reduce the purchasing and associated costs. It is usual for the President to account for the cost of purchases based on his personal expenses attributable to each purchase together with the actual cost of purchases. The US component is elated about this costing method which favors it and would wish that this arrangement continues. The two units prepare separate financial statements which are audited by separate

accounting firms before the two financial statements are consolidated in Canada for the President's evaluation.

Required:

As the audit senior, write a report to the board of directors evaluating, with appropriate justifications, from the scenario above, at least 7 areas of risk which the auditor needs to consider and provide controls to mitigate the risk.

Question 2

Inquisitive Company (IC) is an on-line trading business established by Thomas Jones. The business buys assorted household goods from different manufacturers locally and abroad. Orders are made on-line from suppliers. Customers also order goods on-line from YEC and their invoices are processed and transmitted to the store from where the goods are dispatched to the customers through the delivery stores scattered all over the country. IC has not been satisfied with the work of the previous auditors and has approached your firm to be appointed as the new auditors. Appropriate professional clearance has been resolved for the work to commence. You are the audit manager responsible for the engagement. You have also been assigned on the job with some new trainees who are not conversant with controls in on-line businesses.

Required:

Write a report to audit committee evaluating FOUR risks associated with the business of IC in the application of electronic data interchange in an on-line business and FOUR effective controls that may be put in place to minimize the risks.